The Basics of Social Security

Updated With the 2000 Board
of Trustees Report

The U.S. Congress enacted the
Social Security Act in 1935, creating the Old-Age and
Survivors Insurance (OASI) program, which provided
retirement income benefits to workers ages 65 and older
in commerce and industry (except railroads). The system
became effective in 1937, and is financed by a payroll
tax paid by employers and employees. In 1939, the system
was expanded to cover dependents and survivors of covered
workers. Legislation enacted in 1950 and subsequent years
allowed states the option, under certain conditions, to
provide Social Security coverage to their employees. The
Social Security Act Amendments of 1983 prohibited states
from opting out of the Social Security program. In 1990,
Social Security coverage became mandatory for state and
local employees not covered by a state or local
government retirement plan.

In 1956, the Disability Insurance
(DI) program was added to the Social Security program,
providing income to disabled workers. In 1958, dependents
of disabled workers receiving benefits under the DI
program became eligible for benefit payments.

Currently, the U.S. Department of
the Treasury credits the Medicare and Social Security
trust funds with any annual excess of Social Security and
Medicare tax revenues over the amount spent for current
benefits. By law, these assets must be invested in
special securities issued by the Treasury. The government
then spends these assets to ease fiscal
pressures on other programs or, currently, paying down
government debt. The trust fund surpluses are not
reserved for future Social Security and Medicare benefits
but are bookkeeping entries showing how much the Social
Security and Medicare programs have lent to the Treasury
(or alternatively, what is owed to Social Security and
Medicare, including interest, by the Treasury). When the
trust funds go into negative cash flow, the Treasury must
start repaying the money.

For budgetary purposes, the date on
which the trust funds go into negative cash flow (i.e.,
the benefit payments exceed the income from payroll taxes
and the taxation of benefits) is significant because it
marks the point at which the government must provide cash
from general revenues to the programs rather than receive
surplus cash from them to fund other current spending.

According to the 2000 Social
Security trustees' report, under intermediate
assumptions, the combined Old-Age, Survivors and
Disability Insurance (OASDI) trust fund expenses are
expected to exceed income from taxes in 2015. By 2025,
OASDI expenses are expected to exceed income from taxes
plus interest income (negative cash flow), and the trust
fund is expected to be exhausted by 2037. The DI trust
fund is expected to go into negative cash flow in 2012
and to be exhausted in 2023, and the OASI trust fund is
expected to go into negative cash flow in 2026 and be
exhausted by 2039.

The Social Security trust funds are
derived from payroll taxes assessed on employers and
employees. Under current law, the payroll taxes are
assessed as follows. OASI payroll taxes for 2000 are
based on a combined employer/employee rate of 10.6
percent of earnings up to a maximum annual taxable amount
of $76,200. The maximum taxable amount of earnings
increases in proportion to increases in the average wage
level. In 1999, total income for the OASI trust fund was
$457.0 billion: $396.4 billion was in payroll taxes,
$10.9 billion was in taxation of benefits, and $49.8
billion was interest income.

DI payroll taxes for 2000 are based
on a combined employer/employee rate of 1.8 percent of
earnings, up to a maximum taxable amount of $76,200. The
maximum taxable amount of earnings increases in
proportion to increases in the average wage level. In
1999, total income for the DI trust fund was $69.5
billion: $63.2 billion was from payroll taxes, $0.7
billion was from taxation of benefits, and $5.7 billion
was from interest income.

In 1992, the DI trust fund went
into negative cash flow and was projected to become
insolvent in 1995. To alleviate this problem, Congress
enacted the Social Security Domestic Employment Reform
Act of 1994(P.L. 103-387), which reallocated a portion of
OASI taxes to the DI trust fund, effective retroactively.

In 1999, 38.1 million beneficiaries
received benefit payments from the OASI program. In 1999,
6.5 million individuals, disabled workers, and their
dependents received benefit payments. Under intermediate
assumptions, the number of OASI beneficiaries is
projected to increase to 40.5 million in 2005 and to 71.0
million in 2030, and the number of DI beneficiaries is
projected to increase to 8.1 million in 2005 and to 12.1
million in 2030.

Estimated Average Monthly Social
Security Benefits:
Before and After the December 1999 Cost-of-Living Adjustment
(COLA)

Before 2.4% COLA

After 2.4% COLA

All Retired Workers

$ 785

$ 804

Aged Couple, Both
Receiving Benefits

1,316

1,348

Widowed Mother and Two
Children

1,573

1,611

Aged Widow(er) Alone

757

775

Disabled Workers,
Spouse and One Or More Children

1,225

1,255

All Disabled Workers

736

754

In 1945, the number of covered
workers per OASDI beneficiary was 41.9. By 1965, that
number was 4.0, and in 1999, it was 3.4. Under
intermediate assumptions, the number of covered workers
per OASDI beneficiary is estimated to be 3.3 in 2005, 2.1
in 2030, and 2.0 in 2060.

In 1999, total benefit payments
from the OASI trust fund amounted to $334.4 billion.
Total benefit payments from the DI trust fund were $51.4
billion.

Treasury Secretary Lawrence H.
Summers acts as the Managing Trustee of the OASDI trust
funds, and William A. Halter, Commissioner of Social
Security, is the Secretary. The other trustees include:
Alexis M. Herman, Secretary of Labor; Donna E. Shalala,
Secretary of Health and Human Services; Kenneth S. Apfel,
Commissioner of Social Security; Stephen G. Kellison,
Chief Actuary of The Variable Annuity Life Insurance
Company; and Marilyn Moon, an Economist at the Urban
Institute.

Source: Employee Benefit Research Institute, EBRI Databook
on Employee Benefits, fourth edition; and U.S. Social
Security Administration, 1998 Annual Report of the Board of
Trustees of the Federal Old-Age and Survivors Insurance and the
Disability Insurance Trust Funds, 2000 (Baltimore, MD: U.S.
Social Security Administration, 2000).